You may not have heard of the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), but if your business is looking for investment, these attractive tax breaks could help you attract the funding you need.
Small and medium-sized enterprises (SMEs) are the lifeblood of the British economy and account for 99 percent of the businesses in the UK today. To encourage investment into these companies, the UK government has introduced tax breaks to help them raise the funds they need.
Clearly, investing in SMEs is riskier than buying large and established companies like HSBC, Apple or Shell. The fact that smaller companies are not listed on the stock market means there’s also no easy way to sell your shares. However, the potential rewards of investing in a SME are greater, with the potential for investors to generate much higher returns
The Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) was set up by the UK government in 1994 to encourage investment in companies with 250 employees or less, and no more than £15million of assets. To qualify for the scheme a company must meet the following criteria:
- It must carry on a ‘qualifying trade’ and not be unquoted when the shares are issued to investors. It must carry on the qualifying trade for at least three years;
- No investor should hold more than 30 percent of the company’s share capital or have a connection to the business (i.e. be a partner, employee or director);
- The money raised under the terms of the scheme must be used in the qualifying business activity and should not be used to fund the acquisition of an existing company or its goodwill.
The benefits for investors
To qualify for the scheme, investors cannot be connected to the company in any area or own more than 30 percent of the shares. They can invest a maximum of £1million each year and will benefit from:
- Income tax relief of 30 percent, so an investment of £10,000 in a year would allow an investor to knock £3,000 of their tax bill for that year;
- No capital gains tax on any profits generated by the EIS investment;
- The ability to offset any loss made on the investment against an investor’s income tax bill for the year;
- Potential for 100% relief on inheritance tax (available after holding investment for two years and provided shares are still held at time of death).
The Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) is a more recent initiative, having been set up in 2012. The SEIS is designed to attract investment in smaller companies at an earlier stage in their lifecycle. To qualify businesses must have no more than 50 staff and a maximum of £200,000 in assets. The business must also be less than two years old.
The benefits for investors
The tax benefits associated with the SEIS are even more attractive than the EIS due to the additional risk associated with investing in a business at such an early stage. A maximum of £100,000 can be invested through SEIS in any tax year. The benefits for investors include:
- Income tax relief of 50 percent, so investors receive £5,000 of their income tax bill for every £10,000 they invest;
- No capital gains tax to pay on profits, potential for 100% relief from inheritance tax and the same loss relief on any losses the investor makes;
- Investors also benefit from an additional relief capital gains investment relief, which can be used if capital gains tax has been paid on other investments.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.